Johnson & Johnson's 3 Biggest Sources of Growth Over the Next 10 Years

Healthcare conglomerate Johnson & Johnson (NYSE:JNJ) is a staple in the portfolios of conservative long-term investors and seniors alike.

For decades, J&J, as the company is more commonly known, has found ways to grow sales, boost its profitability on an adjusted basis, and hand out more cash to investors. In fact, Johnson & Johnson is working on a 55-year streak of increasing its annual dividend. You can count on two hands how many publicly traded companies currently boast a longer streak, and J&J's 2.6% yield is nicely ahead of the average yield of S&P 500 stocks. Add the icing on the cake, which is very low volatility, and we have a stock that has the potential to make money for investors in practically any economic environment.

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But even greats like Johnson & Johnson need to find ways to keep their growth engine churning – and that's not always easy for megacap stocks. Investors have rightly questioned where J&J's future growth is going to come from. And while we don't know the answer with any certainty, this Fool believes J&J has three pretty clear paths to growth over the next decade.

1. Specialty pharmaceuticals

Although J&J is a well-rounded company from the perspective of geographic and operational diversification, it has, in recent years, placed far more emphasis on its pharmaceutical segment. In 2012, Johnson & Johnson was deriving 37.7% of its total sales from pharmaceuticals, while its recently released second-quarter report showed that 45.8% of sales now comes from pharmaceuticals. Pharma is a ticket to strong pricing power, rapid growth, and high margins, so it's no wonder J&J has chosen to turn its attention to drug development.

But it's not just pharmaceuticals in general that'll be pulling the weight for J&J. Instead, the company will be placing its faith in specialty medicines to drive growth, especially in the oncology segment.

Few, if any, prescription therapies have more pricing power than cancer drugs. J&J has witnessed sales of relatively new multiple myeloma drug Darzalex, which was licensed from Genmab, soar. On a year-over-year basis, Darzalex sales climbed to $299 million worldwide in the second quarter from $108 million in Q2 2016. This puts Darzalex on track to easily become a blockbuster this year, and to potentially tack on bigger gains if its label is further expanded.

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J&J is also benefiting from the rapidly rising sales of blood cancer drug Imbruvica. Recognized sales of Imbruvica rose 55.1% on an operating basis (excluding currency movements) in the second quarter to $450 million worldwide. J&J shares Imbruvica's net sales with AbbVie, which acquired Pharmacyclics, the original developer of Imbruvica, for $21 billion. J&J licensed Imbruvica years before the purchase and receives a healthy minority stake of the drugs' net sales. Imbruvica sales could peak at $7 billion annually, per analyst estimates.

Look for new specialty drug approvals, and organic growth via volume and price increases in specialty medicines, to be major growth drivers over the next decade.

2. Medical devices focused at baby boomers

Secondly, a dark horse growth candidate for J&J toward the end of the coming decade is medical devices.

Johnson & Johnson is among the largest medical device companies in the world, but investors have witnessed its growth stall over the past half-decade thanks to a confluence of factors. These include a general slowdown in GDP growth in Europe that's hurt its EU device sales; uncertainty in the U.S. healthcare system that's caused consumers to hold off on elective surgical procedures; and more competition in the medical device space, which has meant weaker pricing power.

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There's no sugarcoating that organic growth expectations have commonly been in the 1% to 2% range in an optimistic scenario. But things could be about to change thanks to baby boomers in the United States. Boomers began retiring in droves nearly a decade ago, and they'll continue to do so pretty much throughout the next decade. We're talking about an average of more than 10,000 Americans a day reaching age 65. The U.S. Census Bureau is forecasting a jump in the elderly population (age 65+) from 48 million in 2015 to 88 million by 2050.

It's no secret that seniors need more medical attention to maintain their quality of life than young adults, which means this veritable doubling in J&J's patient pool represents a major growth opportunity for the company. As a major player in hip, knee, spine, and trauma-based surgical devices, J&J appears poised to capitalize on the aging of America beginning in the 2020s, with more pronounced growth likely as time passes.

3. Acquisitions, especially concerning pharma

Finally, Johnson & Johnson is probably going to remain very active on the acquisition front, relying on inorganic growth to push its long-term growth rate higher. In particular, I would expect the company to remain active in exploring acquisitions within the drug space.

For those who may not recall, J&J recently completed a mammoth transaction that brought Swiss-based Actelion's specialty lung-disease drug portfolio under its wing for the not-so-cheap price of $30 billion. Specifically, J&J is counting on pulmonary arterial hypertension drugs Opsumit and Uptravi to reach in the neighborhood of $2 billion each in peak annual sales, and it's hoping its 16% stake in Idorsia, the spun-off company containing Actelion's developing therapies, pans out. The acquisition of Actelion is expected to boost J&J's long-term growth rate by 1.5% to 2%.

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However, J&J is better known for gobbling up small- and mid-cap drug developers, because it tends to prefer taking control of the drug development process from smaller companies. One company that may be firmly on J&J's radar is Geron (NASDAQ:GERN), which it already has a licensing partnership with.

In 2014, Geron wound up receiving $35 million in upfront cash and had $900 million in various milestones dangled like a carrot, along with possible sales royalties, so J&J could get its hands on imetelstat. In early-stage trials, imetelstat became the only drug ever to produce a partial or complete response in patients with myelofibrosis, a rare disease that causes scarring of the bone marrow. Since no other drugs have been shown to treat the actual disease, imetelstat could become a blockbuster drug, if approved. If that's the case, J&J could just gobble up Geron in a buyout.

There you have this Fool's prediction. Look to specialty pharma, medical devices, and a steady stream of acquisitions to fuel Johnson & Johnson's growth over the next 10 years.

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